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2022 (6) TMI 1346 - AT - Income TaxDeduction u/s 36(1)(viia) - deduction of provision for bad and doubtful debts against the advances of rural branches - provision made for bad and doubtful debts in accordance with the provision of the Gujarat Cooperative Societies Act,1961 read with the consequential provision in the bye-laws of the assessee - assessee is a District Co-Op Bank and as such engaged in the business of banking activities, having various branch including rural branch - HELD THAT - As it is a settled position in the law that explanation to Section 36(1)(viia) includes rural branch of cooperative banks as per the decision KANNUR DISTRICT CO-OPERATIVE BANK LTD. 2014 (8) TMI 635 - KERALA HIGH COURT - We find merit in the submission of ld. AR of the assessee. We find that Section 36(1)(viia) was amended vide Finance Act, 2007 and after amendment the benefit of deduction under Section 36(1)(viia) which was available to a scheduled and non-scheduled bank is sought to be extended to a co-operative banks other than primary agricultural credit society or a primary cooperative agriculture and rural development bank w.e.f. 01/04/2007. Further rest while deduction available to such eligible cooperative banks under Section 80P stood withdrawn by Finance Act, 2006 w.e.f. 01/04/2007. Thus, there was an amendment by way of Finance Act, 2007 to Section 36(1)(viia) w.e.f 01/04/2007 wherein cooperative bank other than primary agricultural credit society or a primary cooperative agriculture and rural development bank, were brought under the provision of Section 36(1)(viia) for claiming deduction in respect of provisions made for bad and doubtful debts. Thus, in view of aforesaid factual discussion and the legal view taken by the Kerela High Court in Kannur District Cooperative Bank (supra), we find that the order of ld. CIT(A) is based on proper appreciation of amended provision of Section 36(1)(viia) which we affirm. So far as objection of CIT-DR and his reliance on the decision of Indore Bench in Jhabua Dhar Khatriya Gramin bank 2018 (9) TMI 533 - ITAT INDORE we find that the ratio of finding of Tribunal is not applicable on the facts of the present case. In the said case the Tribunal relied on the earlier case law in Narmada Malwa Gramin Bank 2012 (3) TMI 619 - ITAT INDORE wherein the issue was restored to the file of assessing officer to re-computing the claim of deduction to the extent of amount written off in the books of accounts. Thus, the finding in the said decision is not at all applicable on the facts of his case. In the result, the ground No. 2 of appeal raised by the Revenue is dismissed. Deduction on account of diminution of value of Government securities - shifting of investment from HTM category to AFS category - change in categorisation from HTM category to current category, is not reflected separately by the assessee in its Balance Sheet as on 31.03.2009 - whether change in valuation as a result of reclassification/shifting is allowable? and/or whether only change in market price during the current year is allowable or entire difference between book value and market price as on 31/03/2009 is allowable? - CIT-A deleted the addition - HELD THAT - CIT(A) held that there is no bar to change the classification in the middle of the year, the classification can be changed only on approval of Board of Directors approved such classification, as has been done in the middle of the year, then claim of loss on account of diminution of value in Govt. securities has no connection availability of deduction. Even if change would have been done in the beginning of the year it could change on 31.03.2009 and the amount of claim would still remain same. On the objection of Assessing Officer that for allowance of claim of deduction is that has assessee regularly followed the method of diminution of value investment under AFS category. CIT(A) held that in case loss as available to assessee would be only Rs.51.17 lakhs for the year under fluctuation and not Rs.5.86 crores and if such theory of AO is accepted then assessee would lose all the loss relating to earlier depreciation and which cannot be said to be just or fair, if the assessee has claimed the loss on account of diminution of securities for the first time and genuineness and correctness of such losses are not doubtful then such case is the claim of loss is allowable. CIT(A) held that there is no requirement of separate disclosure of HTM category and ASF category and as per the RBI s Master Circular, the investment should continue to be classified in Govt. Securities, shares Bond of PSU and others. The categorization in the case of assessee has been done separately as per RBI s requirement and held that assessee is eligible for claim of deduction under diminution in the value investment shifted from HTM category to ASF category. See STATE BANK OF MYSORE VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-12(3), BANGALORE 2009 (5) TMI 610 - ITAT BANGALORE wherein claim of the assessee towards provision of depreciation on account of transfer of securities from AFS Category to HTM Category is allowed - Decided against revenue. Disallowance of claim of deduction u/s 36(1)(viia) by taking a view that the definition of rural branch in explanation (ia) does not cover cooperative banks - HELD THAT - We find that merit in the submissions of the ld AR for the assessee and find that as per section 67A of Gujarat Cooperative Society Act, every society, working in the State of Gujarat, which earned profit from its transactions, shall maintain a bad debts reserve funds. As per sub-section (2) of section 67A, every year, the society shall carry at least 15% of the net profit to the debts reserve funds. All such funds shall be certified by the certified auditors and the expenses incurred in recovering the same shall first be written off as per section 67A(3). It is settled position under law that co-operative banks are primarily a co-operative society. We also noted that the financial statement of the assessee is not only subject to the statutory audit but also subject to the approval of the Registrar of Co-operative society. Thus, considering the aforesaid factual and in view of the statutory provision in the State Co-operative Act, the assessee is also allowed deduction which in line with the provisions of section 67A of Gujarat Co-operative Society Act. So far as objection of assessing officer is that in the profit and loss accounts of the year no such provision is made by the assessee, is concerned, we find that in Kedar Nath Jute Manufacturing Company 1971 (8) TMI 10 - SUPREME COURT held that nomenclature or treatment in the books of accounts in not decisive or conclusive for a particular deduction otherwise allowable under the law. In the result, the ground of appeal raised by the assessee is allowed.
Issues Involved:
1. Deduction under Section 36(1)(viia) for bad and doubtful debts. 2. Deduction for diminution of value of Government securities. Issue-wise Detailed Analysis: 1. Deduction under Section 36(1)(viia) for Bad and Doubtful Debts: - Assessing Officer's Position: The Assessing Officer (AO) disallowed the deduction claimed under Section 36(1)(viia) for bad and doubtful debts, arguing that the assessee, a cooperative bank, does not qualify for the 10% deduction of average advances made by rural branches. The AO restricted the allowance to 7.5% of total income, amounting to Rs. 76.54 lakhs, and disallowed the excess claim of Rs. 7.80 crores. - Assessee's Argument: The assessee contended that it qualifies as a non-scheduled bank and is thus eligible for the 10% deduction of average advances made by rural branches. The assessee also pointed out that the AO had accepted a similar deduction in earlier years. - CIT(A)'s Decision: The CIT(A) allowed the deduction of 10% of average advances made by rural branches, following the Tribunal's decision in Kannur District Cooperative Bank vs. ACIT and the Kerala High Court's ruling. However, the CIT(A) disallowed Rs. 1.067 crores claimed as a statutory bad debts reserve, as it was not debited to the profit and loss account but appropriated from net profits. - Tribunal's Conclusion: The Tribunal upheld the CIT(A)'s decision, affirming that cooperative banks are eligible for the 10% deduction of average advances made by rural branches. The Tribunal also allowed the deduction of Rs. 1.067 crores, recognizing it as a statutory requirement under the Gujarat State Cooperative Societies Act. 2. Deduction for Diminution of Value of Government Securities: - Assessing Officer's Position: The AO disallowed the deduction of Rs. 5.863 crores claimed for the diminution of value of Government securities. The AO argued that the reclassification of securities from "Held to Maturity" (HTM) to "Available for Sale" (AFS) was done in the middle of the year, contrary to RBI guidelines recommending such shifts at the beginning of the year. Additionally, the AO noted that this was the first time the assessee had claimed such a deduction, and the change was not reflected in the balance sheet. - Assessee's Argument: The assessee argued that the reclassification was approved by the Board of Directors and was in line with RBI guidelines. The assessee also pointed out that similar deductions were allowed in subsequent years, and the valuation method was consistently followed. - CIT(A)'s Decision: The CIT(A) allowed the deduction, noting that the reclassification was approved by the Board and that there was no bar on changing the classification in the middle of the year. The CIT(A) also observed that the assessee consistently followed the method of valuing securities at market value in subsequent years. - Tribunal's Conclusion: The Tribunal upheld the CIT(A)'s decision, affirming that the deduction for diminution of value of Government securities was allowable. The Tribunal cited the Supreme Court's decision in United Commercial Bank vs. CIT and other relevant case laws, emphasizing that the method of valuation and reclassification was consistent with accounting principles and RBI guidelines. Separate Judgments Delivered by Judges: Not applicable; the judgment was consolidated. Summary of Appeals: - For AY 2009-10: The assessee's appeal was allowed regarding the deduction under Section 36(1)(viia) for bad and doubtful debts, including the statutory bad debts reserve. The revenue's appeal was dismissed, affirming the deduction for diminution of value of Government securities and the 10% deduction of average advances made by rural branches. - For AY 2010-11: The assessee's appeal was allowed on similar grounds as AY 2009-10. The revenue's appeal was dismissed, affirming the CIT(A)'s decisions. - For AY 2011-12: The assessee's appeal was allowed, and the revenue's appeal was dismissed, following the same principles as in previous years. - For AY 2012-13 and AY 2014-15: The assessee's appeals were allowed, following the principle of consistency with earlier years. Final Order: The appeals of the assessee for AY 2009-10, 2010-11, 2011-12, 2012-13, and 2014-15 were allowed. The appeals of the revenue for AY 2009-10, 2010-11, and 2011-12 were dismissed.
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